Merritt Personal Lines Manual: Chapter 2 Medical Savings Accounts
A newer option, when it comes to specialty health insurance, is the tax-free medical savings account (MSA). It combines a long-term savings account and a high-deductible health insurance policy.
The accounts are part of a program of a health insurance coverage that was put in motion by the Kassebaum-Kennedy Health Insurance Portability and Accountability Act, passed in 1996 could be offered to a limited number of individuals who are self-employed or employed at firms with 50 or fewer employees.
MSAs are like a combination of a cafeteria contribution plan and an individual retirement account (IRA). The insured contribute a certain amount of money to the account each month. That money can be used to pay a variety of medical expenses and it is not subject to income tax.
When the insured start an MSA, the insured also switch to a high-deductible catastrophic health insurance policy. (Both are offered in tandem by the same insurance company.) The annual deductible for a single person must be between $1,500 and $2,250; for families, it must be between $3,000 and $4,500.
Individuals then can contribute up to 65 percent of the deductible into the MSA each year; families can contribute up to 75 percent. The contributions are not subject to federal income taxes and are used to meet the deductible, until the insurance coverage begins to kick in.
MSAs also allow the insured to use the insured's money for a broader range of services than most health plans.
MSAs can cover small, everyday claims, as well as medical expenses that normally would not be covered by other insurance plans such as dental care, eyeglasses, psychotherapy and home health care. MSAs also can be used toward payment of premiums for long-term care insurance or coverage upon leaving a job.
Money that the insured put into an MSA grows tax-free, like an IRA or a 401(k) retirement plan. And unlike a cafeteria plan, MSA funds can accumulate over time. If the annual premium is not exhausted at the end of the year, this amount will roll over into the next year. When the insured turn 59 and 1/2, the money in the account becomes the insured's property and is no longer restricted to use for health care. Prior to that time, the money can be withdrawn for non-health-related expenses, but the insured will have to pay ordinary income tax on whatever money the insured withdraw, plus a 10 to 15 percent penalty.
Premiums for MSAs will differ, depending on such factors as the insured's age, the type of plan and the insured's place of residence. But if the annual premium is not exhausted at the end of the year, this amount will roll over into the next year.
